They say a change is as good as a rest, though it may not apply in this case. Large-scale change is coming to the insurance industry (again!) with the introduction of the International Financial Reporting Standards 17 Insurance Contracts (IFRS 17) by 1 January 2021. The regulation will involve more granular requirements, so I’m afraid rest is definitely not on the cards for insurers.
Broadly, the aim of IFRS 17 is to set out the international requirements an insurer will apply in reporting information about the insurance contracts it issues, and any reinsurance contracts it holds.
It’s currently difficult for investors and analysts to understand the insurance contracts held by an insurer. This is due to the variations in reporting between jurisdictions, and sometimes even within companies. IFRS 17 has been designed to rectify this.
In our own research on IFRS 17, and in consultation with our subject matter expert panel, we have identified three things that will impact insurers the most. These are:
- premium allocation approach eligibility
- the increased granularity of accounting
- packaged products and contracts with different rights and obligations.
To address these issues, insurers will have to carry out very time-consuming work to meet the increased granularity, such as the requirement to identify portfolios of insurance contracts grouped by their risk profile. At a minimum, there will be three groups based on:
- contracts that are onerous at initial recognition
- contracts that, at initial recognition, have no significant possibility of becoming onerous subsequently
- the remaining contracts in the portfolio.
The great news is there are some similarities with Solvency II, which will lighten the load. For example, the work/systems/processes for a best estimate and allowance for risk are the same, as are many of the underlying cash flows in the best estimate.
In our conversations with insurers, we know that they have already done a lot of work to meet the IFRS 9 Financial Instruments implementation date of 1 January 2018. We partnered with a large financial institution to deliver their IFRS 9 programme, which allowed SKT Consulting to build up expertise and knowledge around the IFRS standards.
Now is the time to begin considering how you will comply with IFRS 17. SKT Consulting can provide you with a health check to evaluate where your company currently stands, identify any gaps, and get an improvement plan in place.